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IMF Staff Papers Logo    November 2000
Volume 47, Number 1
The Long-Run Relationship Between Real Exchange Rates and Real Interest Rate Differentials: A Panel Study
By Ronald MacDonald and Jun Nagayasu

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Abstract: This paper empirically examines the long-run relationship between real exchange rates and real interest rate (RERI) differentials over the recent floating exchange rate period. A panel cointegration estimator is applied to a data set of 14 industrialized countries. In contrast to much other research on the RERI model, we find evidence of statistically significant long-run relationships and plausible point estimates. The failure of most other researchers to establish such relationships may therefore reflect the estimation method used rather than any inherent deficiency in the real exchange rate-real interest rate relationship. [JEL F31]

2000 International Monetary Fund